Saving for a rainy day

MONEY -

Hagerstown resident Danae Doubledee used to save regularly by having a portion of her paycheck directly deposited into a savings account.

That stopped when she stopped working to be a stay-at-home mom to her two children, Bryn, 5, and Kali, 3, said Doubledee, 33, who now works part-time as a substitute teacher.

While they still invest for the long haul through the 401(k) plan at her husband's job and some mutual funds, her family has had to sacrifice short-term savings to make ends meet, she said.

"We don't get to save anything these days It all goes to groceries," Doubledee said.

New parents Miranda and Barry Peck of Greencastle, Pa., don't even have a separate savings account.

They just try to be frugal, spending as little from their checking account as they can and considering the remainder their savings, they said.

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Barry Peck, 20, said he travels to Frederick, Md., where he earns more than he could locally working as a heavy equipment operator for Dewey Jordan Inc.

Still, it's gotten harder to save since 9-month-old Madison arrived, said Miranda Peck, 21, who left her job as an assembler at GS Electric and now baby-sits to earn some money.

The federal government's recent statistics on personal spending and savings seem to indicate that a lot of Americans are in the same boat as the Peck and Doubledee families.

Steadily dropping since late 1997, the personal savings rate among Americans has actually dipped into the negative, according to U.S. Department of Commerce's Bureau of Economic Analysis.

As of the first quarter of this year, the personal savings rate was down to minus .7 percent of disposable personal income while personal consumption expenditures rose 1.2 percent, according to the bureau's figures.

And it has continued to decline. The latest bureau figures - for May 1999 - showed a minus 1.2 percent personal saving rate.

While it appears problematic, economists with the federal government say a negative savings rate isn't necessarily cause for concern.

The Washington, D.C.-based Employee Benefit Research Institute (EBRI) is concerned, however, based on disturbing research showing many people aren't saving for retirement, spokesman Danny Devine said.

Pointing out that it's the first time the personal savings rate has slipped below zero since the Great Depression, the nonprofit group has launched a campaign, Choose to Save, to promote savings education and the idea that saving today is vital to a secure financial future.

Negative savings

In simple language, a negative personal savings rate means that Americans spent more in the period than they earned, said Paul Lally, a Bureau of Economic Analysis economist whose job is to add up personal income.

But the calculation doesn't consider the very thing that is fueling Americans' spending spree - capital gains, Lally said.

While contributions to 401(k) plans, individual retirement accounts and other investment savings plans are presumed to be personal savings, appreciation isn't counted as income though it can be included in spending, he said.

The negative savings rate is a result of what economists call the "wealth effect," based on historical patterns on savings and spending during cyclical changes in the economy, said economist Joanna Frodin.

The wealth effect comes into play when there's a big run up in assets, like real estate and stock market portfolios, said Frodin, vice president of supervision, regulation and credit for the Federal Reserve Bank in Philadelphia.

It happened during the real estate boom in California in the 1970s, she said. And it's happening in the latter part of the 1990s because of the astronomical rise in the stock market.

"Consumption is a function of both income and wealth," Frodin said.

What the statistics don't tell is whether people have cashed out that wealth and have real dollars to spend or are just spending more based on what their portfolio is worth, she said.

However, there is a danger if people are spending a lot based on market gains they haven't actually cashed in on and the market drops, Frodin said.

The negative savings situation will be reversed if the economy goes into recession, though there would be a lag, she said.

That's because wealth effect also happens when the economy is going into a recession and people dip into their savings to maintain their standard of living, Frodin said.

Saving for retirement

The Employee Benefit Research Institute's concern about the personal savings rate stems from its research on retirement preparation, including the results of its 1999 Retirement Confidence Survey, spokesman Danny Devine said.